Self-Employed? Map Out Tax Details

Have you joined the ranks of the self-employed? You're not alone. According to the Bureau of Labor Statistics, more than 14.4 million Americans were counted as being self-employed in 2014. Some estimates place the total even higher.

In addition to major lifestyle changes, self-employment really is whole new ballgame when it comes to paying your taxes. Now, you're responsible for reporting all of your own income and deductions for the business on Schedule C.

What makes Schedule C different? If you've been treated as an employee until now, you've filed a Form 1040 listing wages paid by your employer, as reported on your W-2. But you generally weren't able to deduct any expenses related to your job (other than maybe qualifying for a limited deduction for unreimbursed employee business expenses). Now the income and deductions from your business are largely confined to this one tax form, and you're likely to be able to write off several costs that aren't deductible for regular employees.

Of course, Schedule C isn't the whole story. For instance, you may qualify for a generous Section 179 deduction for equipment or other business-related purchases you've added during the year. On 2014 returns, the maximum deduction is $500,000 (scheduled to drop to $25,000 in 2015), plus you may be entitled to "bonus" depreciation. In addition, if you work out of your home, as many self-employed people do, you may be able to claim a home office deduction. Finally, you will have to cope with numerous other complications, such as the stringent rules and limits applying to deductions for business travel and business use of a vehicle.

Self-employment income is taxed at ordinary income rates, currently topping out at 39.6% on the federal level. Typically, your same net amount of self-employment income also is subject to state income tax under the rules of the state where you live.

There are other factors to consider, too. When you file your 1040, you'll also need to pay self-employment tax, the equivalent of the Social Security and Medicare taxes that employees must pay. But employers typically pick up half of the amount owed on behalf of a worker. Because you're self-employed, you pay both the employer and the employee shares, making your tax twice what you'd owe if you were an employee. For the 2014 tax year, the self-employment tax is equal to 15.3% on self-employment income up to $117,000 ($118,500 in 2015) and 2.9% on amounts above that threshold. But you do get to deduct half of the self-employment tax.

Software packages can help you file your own tax return, but professional guidance may still be warranted. Don't get in over your head.